TA Sector Research

Malaysian Economy - September PMI Sees Minor Dip; 3Q Outlook Remains Positive

sectoranalyst
Publish date: Wed, 02 Oct 2024, 10:19 AM

Overview

  • The seasonally adjusted S&P Global Malaysia Manufacturing Purchasing Managers’ Index (PMI) fell from 49.7 in August to 49.5 in September as production declined further amid largely stagnant new orders. Purchasing activity was also reduced, and inventory levels continued to decrease. On a positive note, employment levels saw a slight improvement for the first time in four months, while inflationary pressures eased and remained below their respective series averages.

Details

  • During the surveyed period, output levels remained subdued, as indicated by the seasonally adjusted index staying below the neutral 50.0 mark. This marks the fourth consecutive month of reduced output, with the most recent decline being the steepest since March. Survey respondents highlighted weak new order inflows as a primary reason for the drop, while some also pointed to a sluggish domestic economy as a contributing factor.
  • Moreover, total new orders declined for the third consecutive month in September, although the rate of decline slowed to a marginal level. Firms experiencing reduced orders attributed this to weak client confidence stemming from domestic economic challenges. However, demand from overseas remained strong, with new export orders increasing for the sixth straight month, driven by reports of robust demand, especially across Southeast Asia.
  • Purchasing activity declined at the end of the third quarter, with the rate of reduction accelerating from August to its fastest pace since March, reflecting subdued production needs. Consequently, firms remained cautious with their inventory management, reducing stocks of both purchases and finished goods in September. Manufacturers also noted that delivery delays and elevated raw material prices had impacted input buying during the month. Anecdotal evidence pointed to port congestion and disruptions in the Red Sea as factors contributing to further extensions in suppliers' delivery times.
  • On a positive note, Malaysian manufacturers reported a slight increase in employment levels in September, marking the first rise since May. The expanded workforce capacity allowed firms to continue addressing outstanding business, leading to a marginal reduction in backlogs during the latest survey period.
  • Additionally, the rate of input price inflation slowed compared to August. Malaysian manufacturers partially transferred these increased cost burdens to clients by raising output charges, although the rate of charge inflation eased to its lowest level in four months.

Outlook

  • The average reading for the third quarter remained resilient, indicating sustained improvement in manufacturing sector growth during this period. The average PMI for 3Q24 stood at 49.6, showing only a minimal decline compared to 49.7 in 2Q24.
  • Furthermore, insights from S&P Global indicate that the PMI data suggests GDP growth is maintaining a rate similar to that of the second quarter of 2024, while also pointing to sustained year-on-year improvements in official manufacturing production data. The historical relationship between the PMI and official data shows an upward trend in both GDP and manufacturing production, indicating steady momentum in the third quarter of 2024. Our analysis revealed significant correlations between the PMI figures and official statistics, such as real manufacturing sector data (61.6%), real GDP (61%), and real exports (44.5%). The manufacturing segment's contribution to GDP is expected to increase by 4.4% YoY in the third quarter (compared to 4.7% YoY in 2Q24). Additionally, when using PMI manufacturing as the sole variable in forecasting GDP, the regression analysis suggested that the overall economy could grow by 5.0% YoY (Our official forecast 4.7%). It's important to note that GDP is influenced by factors beyond the manufacturing sector alone.
  • Looking ahead, sentiment in the Malaysian manufacturing sector remained positive at the end of the third quarter. Expectations of improved demand conditions fueled predictions of output growth in the coming year. Confidence levels rose, reaching their highest point since the beginning of the year.

Source: TA Research - 2 Oct 2024

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